The potential £2.7 billion acquisition of Deliveroo by DoorDash has garnered attention as investors prepare to evaluate the proposal, which could result in significant financial gains for Deliveroo’s founder, Will Shu. Despite the company’s struggles since its initial public offering, wherein it lost over half its value, the deal could still be lucrative for Shu.

Trading in Deliveroo shares will be closely watched starting Monday, following a statement from its board indicating they are “minded to recommend” DoorDash’s takeover bid, which values the company at £2.7 billion, or 180p per share.

DoorDash approached Deliveroo on April 5 and has until May 23 to either submit a formal offer or withdraw. The company has been permitted access to Deliveroo’s financial documents.

Rumors suggest that DoorDash may have initially approached Deliveroo last summer at a valuation lower than the current proposed share price. However, both companies have refrained from commenting on previous discussions.

After the market closed on Friday, Deliveroo noted that there was “no certainty” regarding a firm offer and advised shareholders to refrain from taking action.

If the acquisition proceeds at the suggested price, co-founder and CEO Will Shu stands to receive over £172 million, based on his 5.9% stake in the company. Additionally, in September, Shu sold approximately 9.4 million shares for around £14.8 million to assist with personal property investments.

Deliveroo’s highly publicized flotation in 2021, valued at £7.6 billion, was the largest seen in London for a decade but has since been considered a failure. After an initial drop of around a quarter on its first trading day, the stock closed at 146.5p on Friday, leading to significant losses for IPO investors of about 62%. Following news of the potential takeover, the shares rose 16%, or 23p, reaching 170p on Monday.

At 45, Shu is among the top shareholders in Deliveroo, which was established in 2013. Amazon is the company’s largest investor with a 13% stake, while other significant stakeholders include Index Ventures and Morgan Stanley Investment Management.

Deliveroo’s journey began with Shu delivering pizzas to friends, and it has now expanded to operate in ten markets with around 140,000 delivery riders and partnerships with approximately 180,000 restaurants.

Although the pandemic initially boosted demand for meal delivery services, interest has since decreased as investors shift focus to companies demonstrating strong profit margins. Deliveroo did report its first pre-tax profit of £12.2 million last year.

A successful acquisition would represent DoorDash’s continued expansion in the European food delivery sector, following its earlier €7 billion all-share purchase of Wolt Enterprises, finalized in 2022.

The online food delivery landscape has been consolidating, with major players seeking to grow their geographic reach. For example, Prosus, which is primarily owned by Naspers from South Africa, agreed to a €4.1 billion takeover of Just Eat Takeaway earlier this year.

DoorDash was co-founded in 2013 by Tony Xu, and has focused on delivering food to suburban and rural areas, contrasting Deliveroo’s urban-centric roots. The American competitor also offers products from various brands beyond food, including beauty items from Sephora, which it might consider expanding to the Deliveroo platform if the acquisition progresses.

Deliveroo announced on Monday the suspension of its £100 million share buyback due to the potential takeover.

Analysis

Deliveroo exemplifies the value challenges facing stock exchanges, particularly for those that listed in 2021 (as noted by Emma Powell).

Once celebrated as a “true British tech success story” by then-Prime Minister Rishi Sunak, the company’s shares have plummeted to 62% less than the 390p listing price as of this past Friday.

DoorDash’s £2.7 billion offer indicates that investors who participated in the flotation would experience a loss of over 50%. The likelihood of Deliveroo attracting an offer nearing its IPO price appears slim.

The company went public during a surge in demand for delivery services amid pandemic restrictions, leading to inflated growth expectations reflected in shares that initially traded at nearly triple forecasted sales.

In the aftermath of the pandemic, revenue growth has slowed considerably to just 3%, contrasted with 57% growth in 2021. The cost of capital for prospective buyers has also surged due to rising interest rates.

Even with these altered expectations, the 180p offer seems inadequate. It translates to a 38% premium over an undisturbed share price of 130p, particularly when compared to the 63% premium offered by Prosus for the Just Eat Takeaway acquisition earlier this year.

While Just Eat is larger than Deliveroo, it has also faced financial struggles with declining revenue since 2021, which contrasts Deliveroo’s overall growth rate of 19% and its recent profit.

The emergence of DoorDash’s offer is not unexpected, given the consolidation trend within the food delivery sector. There remains a possibility of competing bids, particularly from Amazon, which holds a little over 13% of Deliveroo’s shares. However, such a partnership might face scrutiny from UK competition regulators.

DoorDash, as the leading food delivery service in the U.S., does not overlap with Deliveroo’s market, potentially simplifying regulatory approvals. Acquiring the UK-listed company would grant DoorDash immediate entry into major European metropolitan areas.

According to Jefferies, DoorDash could justify paying up to 230p per share while still benefiting its cash flow, suggesting that Deliveroo’s management should seek a better offer than the initial proposal.